Agricultural Bank of China Remains a Risky Play

Agricultural Bank of China (ABC) is likely to have a greater probability of making future non-performing loans (NPLs) than China’s other big banks, experts say. To that end, it may be more of a risky investment for investors.

Chinese authorities recently announced share reforms and capital injections to clean up the bank in 2007 as preconditions for a planned initial public offering (IPO).

“There will be good news for the share reform of the Agricultural Bank of China next year,” said Liu Mingkang, chairman of the China Banking Regulatory Commission at the 2006 China Financial Forum in Beijing on Dec.26. Liu said he was hopeful the bank would receive capital injections from the government.

Changing the culture of credit and emphasizing risk management is very important to the asset management of Agricultural Bank of China for its restructuring, said Charlene Chu, director at Fitch Ratings in Beijing. “Our opinion is ABC is a little bit behind in some of those areas, so the risk of the flow of new NPLs is higher than at some other institutions.”

China’s other three large state-owned banks, Industrial & Commercial Bank of China (ICBC), Bank of China and China Construction Bank have already received bailouts and gone public. In October, ICBC raised US$21.2 billion in the world’s largest IPO, according to state media. Demand for Chinese bank stocks has been strong, leaving many analysts mystified because share prices have been increasing irrespective of the banks’ fundamentals, Chu said.

Restructuring ABC to prepare for an IPO could take as little as three months or up to as long as a year, according to Qiang Liao, a credit analyst at Standard and Poor’s in Beijing.

At the end of 2005, ABC had non-performing loans of 739.8 billion yuan (US$94.7 billion) and a bad loan ratio of 26.31%. It will require a capital injection of about US$100 billion, according to state media. This amount surpasses the combined US$60 billion required to bail out China’s other three large state banks.

(Patrick Martino contributed to this report.)

This article originally appeared in China Finance & Currency Week, which has since ceased publication.